Fund Managers Eye Exec Comp

June 28, 2002 ( - In a telling sign of how much Wall Street's confidence in the goings-on in corporate boardrooms has eroded, 90% of Morningstar's top-rated fund managers say their investing decisions are partly based on a company's executive pay practices.

That response to the latest survey by Pearl Meyer & Partners stood in start contrast to the results of the same question in 1998 when 58% said they factored in pay policies when making buying decisions.

In general, fund managers aren’t happy with how closely corporate boards are supervising their senior managers – particularly in the size of compensation packages, according to the survey by the executive compensation consultants. Seven out of ten say chief executive officers are getting paid too much.

Board Games

The managers surveyed also paid attention to board activities – particularly director qualifications, independent, and stock ownership levels. Some 80% consider those issues at least part of the time in forming a buy or sell opinion, according to Pearl Meyer. Half of respondents factor board governance in all or at least most of the time.

The survey also revealed that some 70% of the fund managers surveyed characterize the average $10 million CEO pay package among the nation’s 200 largest companies as too high.

Further, stock options, which currently account for more than half the value of CEO pay packages, also come under fire.  Nearly 75% of respondents say current option grant levels are higher than necessary for executive motivation – the proffered reason for the option grants to begin with.

Accounting for Options

In a related issue, nearly 75% of respondents say companies should show the option grants as a charge to earnings. If proposed changes in the accounting treatment of stock options result in lower earnings, 48% of respondents predict a negative impact on stock prices.

The Pearl Meyer & Partners survey, conducted last month, questioned equity mutual fund managers selected from Morningstar’s 500 Source Book or ranked 4 or 5 stars by Morningstar. 

The Morningstar Source Book is a selected group of funds picked by Morningstar. The survey results reflect responses from managers of 33 funds.